(Bloomberg Opinion) -- Germany has long stood accused of being the main obstacle on the road to complete Europe’s monetary union. Yet, after a constructive proposal from Finance Minister Olaf Scholz over the creation of some form of joint deposit insurance, it is hard to treat Berlin as the grudger-in-chief of the euro region. In fact, Italy could soon become a bigger hurdle on the way to a stronger and safer single currency.
Italy has traditionally been a strong supporter of the European project. A founding member of the European Union, Italy went to great lengths in the mid-1990s to join the euro at its inception. Politicians of all stripes have advocated greater European integration, namely a fiscal union that would see the emergence of a European Treasury and “Eurobonds,” sovereign debt issued jointly by member states.
However, Italians became more reluctant to back steps toward a closer union after the euro-zone debt crisis and ensuing recession, which hit Italy very hard. Successive governments and the Bank of Italy criticized parts of the reforms done at the height of the crisis to make the single currency more resilient — in particular the bail-in mechanism, whereby creditors are forced to take a hit before a government can inject funds into a failing banks. They argued it actually increased financial instability.
Last year’s electoral triumph of euroskeptic forces including the League and the Five Star Movement has accelerated this process. An unholy alliance of populists and elites is now increasingly hesitant to accept the kind of compromises needed for greater economic and financial integration.
Take Scholz’s proposal to complete the banking union. In order to have the necessary joint deposit insurance, Germany’s finance minister says that the euro area must address the excessive concentration of sovereign bonds in bank’s balance sheets, a particularly salient problem in Italy. Italian Finance Minister Roberto Gualtieri immediately rejected the idea, saying it would have “a negative impact” as it could destabilize Italy’s government debt. The Bank of Italy’s governor, Ignazio Visco, has also expressed concerns about the risks of introducing prudential requirements to the sovereign exposure of banks. Suddenly Scholz looks too optimistic when he says it’s possible to reach a deal in principle this year.
What’s more, Italy’s newfound recalcitrance risks undermining agreements that looked settled. Last June, the euro zone’s finance ministers agreed to reform the European Stability Mechanism, the monetary union’s rescue fund. The changes would allow the ESM to act as a backstop to the Single Resolution Fund, increasing its firepower to handle banks in trouble; give the ESM greater powers in assessing a country’s debt sustainability before it can receive any help; and make it easier to restructure a member state’s sovereign debt if needed.
The Italian government – and the Five Star Movement in particular – are now sounding alarmed about some of these changes, fearing they could hurt Italy. This skepticism is shared by the opposition League and Italy’s banking association, thereby threatening to derail the confirmation of the ESM reform accord at a gathering of EU leaders in December. Failure to do so would send a terrible signal, further reducing hopes that any meaningful EU reform can be achieved in the absence of a crisis.
It would be wrong to put the blame for delayed euro-zone reform solely with Rome. A bloc of mainly Northern states, led by the Netherlands, has vetoed more ambitious changes. And as far as Scholz and Germany are concerned, there is no reason why there should be conditions for completing the banking union, since a joint deposit insurance would make all banks safer, including Germany’s.
But Rome seems to be in too much of a vulnerable position to take such a hard-headed stance. Were investors to lose confidence in the stability of the single currency, high-debt countries such as Italy would be particularly exposed. A stronger monetary union — including a complete banking union and perhaps some form of fiscal union — is the best antidote to preserve financial stability.
Of course, the best way forward for the Italian government would be to put its sovereign debt on a sustainable shrinking path. But as public debt keeps rising, the divergence with other countries in the euro region — including Germany and the Netherlands — become harder to sustain. The positions on how to take the monetary union forward risk becoming more opposed and entrenched. This does not bode well for the future of the euro.
To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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